Richard Timberlake on Money

EF [Econ Focus}: Let's start with a unifying theme of your work: Your support of a gold standard. Several great neoclassical monetary theorists -- Marshall, Walras, Wicksell, Fisher, and Keynes -- argued that a rules-based fiat money could outperform a gold standard. Why do you disagree?

Timberlake: Let me say first of all that I am not a "gold bug." Nonetheless, the fact is that an operational gold standard works to promote a free society, and no other monetary policy seems able to do so.

The key word in your question is "could." But the policymakers won't allow it to. The reason they won't is found in public choice economics, which argues that the policymakers, like all other human beings, have a stronger motive to further their own self-interest than to promote sound public policy -- not only at the Fed, but everywhere. Until maybe 10 or 20 years ago, economists who studied money felt that they could prescribe some logical policy for the Federal Reserve, and ultimately the Fed would see the light and follow it. That proved illusory. A central bank is essentially a government agency, no matter who "owns" it. The Fed's titular owners are the member banks, but the national government has all the controls over the Fed's policies and profits. And as with all government agencies, the Fed is subject to public choice pressures and motives.

This is from an excellent interview, done by the Richmond Federal Reserve Bank, of monetary economist Richard Timberlake, who is 92 years old and still going strong. In fact, he published a book last year titled Constitutional Money: A Review of the Supreme Court's Monetary Decisions. (2013)

The whole interview is worth reading.

Here's his answer about what inspired him to write Constitutional Money:

Timberlake: Primarily, it was the observation that Supreme Court decisions had never been discussed analytically in terms of monetary economics. In U.S. history there have been about 10 important monetary rulings. I found that these decisions very much impacted both beliefs and policies and significantly influenced monetary affairs. I also found an important trend during the period I studied: Those court decisions rendered the constraint of the gold standard less and less forceful.

The culminating decisions were the last ones I examined -- the Gold Clause decisions of 1935, which took place after Congress significantly devalued the dollar in terms of gold in 1933-1934. The U.S. Treasury then was authorized to call in all the gold and melt it down so it was unusable as money, while government ownership and legislated devaluation gave the government a windfall profit of $2.8 billion. This profit almost equaled the federal government's total revenue for that year. To prevent a similar windfall that would benefit private holders of contracts redeemable in gold, Congress banned gold payments for contractual debts. The constitutionality of this decision then became a court case.

In its decision upholding the abrogation of gold clauses, the Supreme Court reaffirmed, without re-argument, its decisions in 1871 and 1884 that gave Congress full control over the monetary system, including the issue of full legal tender paper money called "greenbacks." Those decisions were politically motivated and patently anti-gold standard, as well as invalid. I say "invalid" in the sense that the decisions were contrary to all constitutional precepts, but also in the sense that there was a dichotomy between what the Supreme Court decided in 1871 and 1884 and the monetary principles the public universally believed and acted on. Subsequently, the Fed was created in 1913 with no presumption at all that it had complete control over the monetary system. But neither that fact nor the absence of any other common evidence supporting the court's conclusion ever became part of the argument in the Gold Clause cases. Passage of the Gold Standard Act in March 1900, for example, would have been superfluous and trivial if Congress had actually had such constitutional powers.

On his inspiration from Milton Friedman:

I recall the time when I presented a potential Ph.D. thesis proposal at Chicago to the economics department. The audience included professors and many able graduate students. I could feel that my presentation was not going over very well. After the ordeal was over, Friedman said to me, "Come back up to my office." When we were there, he said, "The committee and the department think that your thesis proposal has less than a 0.5 probability of acceptance." I knew that was coming, and I despondently replied that I had had a very frustrating time "finding a thesis." My words suggested that a thesis was a bauble that one found in a desert of intellect that no one else had discovered. It was then that Milton Friedman turned me around and started me on the road to being an economist. "Dick," he said, "theses are formed, not found." It was the single most important event in my professional life. I finally could grasp what economic research was supposed to be.

This last quote leads to two personal reminiscences, one about Dick, the other about my students.

First, Dick Timberlake. Dick told me this story when I interviewed him about 10 years ago. I have it on Audio/Video. He told it with a lot of passion and excitement. He then went on to say: "I used to think that Milton Friedman was the smartest man in the world; then I met [his son] David." When I visited Milton's widow, Rose, in about 2008, I told her that story.

Second, my students. My students will often come to me to talk about how to "find a topic." I tell them that they should think of something they are interested in and then start reading the literature. I have been singularly unsuccessful at getting them to do the latter. They seem to have the "desert" model and it's hard to talk them out of it.

Comments and Sharing

If policy makers don't have incentives to maintain a hard fiat currency, what incentives do they have to maintain a hard gold currency? Belief in a gold standard has always seemed to me belief that gold somehow grants immunity to public choice concerns.

The seizure of private gold holdings during the Great Depression was nothing short of evil. The security of many people across the country stolen by the government that was supposed to be representing them ... unforgivable!

The gold standard was a concept more than it ever was a true monetary rule.

For a gold standard to work, Hume's price-specie flow mechanism must be functioning. This requires all participating countries to monetize their gold inflows and to keep their gold reserve / currency ratio within a certain specified range.

But no one followed this gold standard "rule". Certainly the United States did not follow it. In the years after WWI - when the US had tremendous gold inflows, the FED refused to monetize the new gold reserves for fear (and rightly so) of causing inflation. But inflation (and lower real interest rates) was needed to reverse the gold inflows - thereby following the price-specie flow "rule" of the gold standard.

France did the same thing (check out Douglas Irwin's paper on this- "Did France Cause the Great Depression". Sept 2010.

The reality is that policymakers refuse to follow monetary rules - no matter if it is a gold standard or a fiat money rule.

As an example, check out our current Fed Chairman's recent refusal to be at all transparent about the future direction of monetary policy. This is an example of policymaker's historic preference for discretionary (politically expedient) monetary policy

Empirical question, no? A quick check of the data at MeasuringWorth.com shows that US NGDP was $9.449b in 1879, the year the US rejoined the gold standard, and $39.517b in 1913, the last full year of the classical gold standard. The implied compound annual growth rate was 4.3%, within the 4-5% range.

Of course, the growth rate of nominal GDP under the classical gold standard wasn't constant from year to year. But it was more constant than in the period that followed.

Empirical question, no? A quick check of the data at MeasuringWorth.com shows that US NGDP was $9.449b in 1879, the year the US rejoined the gold standard, and $39.517b in 1913, the last full year of the classical gold standard. The implied compound annual growth rate was 4.3%, within the 4-5% range.

Of course, the growth rate of nominal GDP under the classical gold standard wasn't constant from year to year. But it was more constant than in the period that followed.

This is a great post. I have a dissertation to write - and I've found my topic. Now I'm buying books that I ought to read - not merely books that I'm required to read. Examining the previous research is easy if you know where to look. It's daunting to ask a professor where to look. "What if they think that I don't know enough?" Of course - no one knows enough. And good advisers know it too.

During the gold standard years of 1873 to 1896 there was a price level drop of 32% - equal to a deflation of about 1% per year. (by 1913 the price level returned to that of 1873)

So how do we interpret NGDP growth when there is year over year deflation? NGDP targeting as a monetary policy rule seems to make sense during times of inflation. But it seems to break down during times of deflation.

As Prof. White points out, NGDP growth during the gold standard was in the 4-5% range. But that 4-5% NGDP growth was concurrent with 1% deflation.

The 4-5% NGDP growth implies that liquidity was optimal for economic growth. But the 1% deflation implies that the quantity of money was severely constrained - thus limiting economic growth.

So it seems that NGDP targeting as a monetary policy rule breaks down in times of deflation.

P.S. There is a very nice discussion of the gold standard in "The Clash of Economic Ideas". I found it quite valuable.

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